In the case of CIT v Canon India Pvt. Ltd., Hon’ble High Court held that whenever a subsidiary company is getting subsidy from it’s holding company, then the amount of subsidy which has not been spent will not be considered as income of the Assessee.
Facts of the Case
The Assessee is a subsidiary company which started its operations in India in 1996. During the course of its business, the Assessee entered into various agreements/transactions with its Group Companies. These transactions pertained to purchase and resale of products such as photocopiers, printers, scanners and cameras in India. The Assessee filed its return of income for the AYs in question and disclosed the transactions with its Associated Enterprises. The AO made a reference under Section 92CA of the Act to the Transfer Pricing Officer for determination of Arm’s Length Price in respect of various transactions
entered into by the Assessee during the relevant AYs.
The TPO found that the reported international transactions entered into by the Assessee with its AE’s were at arm’s length. However, the TPO found that the Assessee had incurred Advertisement, Marketing and Promotional expenditure, which was much in excess of the expenditure incurred by other comparable entities. On the aforesaid basis, the TPO made transfer pricing adjustments and directed the AO to add Rs. 33,25,04,380/- and Rs. 52,19,78,244/- to the taxable income of the Assessee for the AY’s 2007-08 and 2008-09 respectively.
The TPO report was challenged by the assessee before the DRP. However, the Assessee was unsuccessful and the TP adjustments made on account of AMP expenditure were upheld by the DRP. Resultantly, the AO passed the final assessment orders dated 25th October, 2011 and 29th October, 2012 for AYs 2007-08 and 2008-09 respectively, making the additions as directed by the DRP.
In addition to the above, the AO also added Rs.7,62,58,434/- which was unutilised subsidy, to the total income of the Assessee for the AY 2007-08. Similarly, the AO added a sum of Rs.10,51,00,000/- to the total income of the Assessee for the AY 2008-09 which reflected unutilised subsidy received by the Assessee from its holding company. The AO observed that the subsidies received by the Assessee became its property notwithstanding that the same had not been spent for the purposes for which they were received. And, on the aforesaid basis, the AO treated as its income for the relevant previous year.
Held by the Hon’ble Tribunal
The Hon’ble Tribunal held that the Subsidy, Trade discount in volume rebate, Cash Discount and Commission were to be excluded from the scope of AMP expenditure. The Tribunal further held that unspent subsidy was not the income of the Assessee but was held in trust by the Assessee, to be spent for the specific purposes for which it had been remitted by CSPL.
Contentions by the Revenue
The ld. Counsel for the Revenue contended that two issues remained for consideration, the issue relating to exclusion of subsidy from AMP expenditure and the issue as to the character of the unutilised subsidy. Further, it was contended that although the quantum of subsidy received would have to be considered at the time of making TP adjustments but the same could not be reduced from the AMP expenditure at the threshold to arrive at the net expenditure on AMP for considering whether the same were at ALP and determining the consequent TP adjustment, if any. It was further submitted that the entire AMP expenditure incurred by the Assessee would have to be considered in determining whether the same required any TP adjustments. It was also submitted that the subsidy received could not be reduced from the expenditure at the threshold. Also, it was submitted that the Tribunal had erred in not treating the unutilised subsidy as income of the Assessee.
Contention of the Assessee
The ld. Counsel for the assessee contended that subsidy was received by the Assessee for meeting specific advertisement and sales promotion expenditure and the Assessee was obliged to utilise the amount of subsidy for the specified purposes. In the circumstances, the unutilised subsidy could not be treated as income in the hands of the Assessee. Insofar as the issue of deducting the subsidy received from the AMP expense was concerned, it was submitted that the said issue had been conclusively decided in favour of the Assessee by the decision of the Tribunal’s Special Bench in the case of LG Electronics Private Limited 2013 (24) ITR (Trib.) 634 (Del), where the Hon’ble Tribunal had recorded that the AO had the duty to exclude the amount of subsidy received for meeting AMP expenses at the threshold itself, that is, before commencing the exercise of benchmarking the AMP expenditure. He further submitted that the aforesaid aspect had not been contested by the Revenue before the Tribunal and has been raised for the first time in oral submissions before this Court.
Held by Hon’ble High Court
The Hon’ble High Court observed that it was not disputed by the Revenue that subsidies were received by the Assessee for some specific obligation to incur expenditure on specific activities and it was not open for the Assessee to divert the amount for any purpose other than for which it was remitted. The Tribunal had examined the relevant facts and also concluded that the unspent amount is to be held in trust. In view of the aforesaid facts, it would, clearly, be impermissible for the Assessee to appropriate and reflect the amount of unutilised subsidy as its income. Therefore, the Assessee has not credited the subsidies received to its Profit & Loss Account, but reflected the same as a current liability. The Assessee could credit the Profit & Loss Account with the quantum of subsidy only if the corresponding expenditure was also debited to the Profit and Loss Account maintained by the Assessee. The Hon’ble High Court further held that the unutilised subsidy is not required to be recognised as income of the Assessee in the year of its receipt.
Then, on the next issue whether subsidy received by the Assessee has to be excluded from AMP expenditure at the threshold before making any TP adjustments. The Hon’ble High Court was of the view that the said question would be inextricably linked with the manner in which ALP of the relevant international transaction is determined. The Hon’ble High Court observed that in one of the case where the issue was same, the case was remanded to the determination of ALP to the Tribunal in terms of the decision in Sony Ericsson Mobile Communications India Pvt. Ltd. (2015) 374 ITR 118 (Delhi). Therefore, it would be premature to consider this issue in isolation and without reference to the determinative exercise to be conducted by the Tribunal or the concerned Income Tax Authority. The question whether subsidy has to be reduced from the AMP expenditure incurred by the Assessee at the threshold or by way of a later adjustment would depend on various factors including the comparables selected for the purposes of determining the ALP as also the methodology adopted. Accordingly, the appeals were disposed.